Fugitive Banker Gives His Side of Story re TIBC

Frank Kane over at The National conducted an interview with Glen Stewart which was in the June 8 issue of The National.

To set the stage, as I understand it, there are two contentions central to the TIBC/Awal/AlGosaibi/Saad Group saga:

1. That there was massive fraud at the these entities which was the direct cause of their apparent collapse.
2. That Mr. AlSanea was improperly exercising control over TIBC and certain AlGosaibi units (the entity mentioned most was AlGosaibi's Money Exchange).  As noted in the article, a charge that Mr. AlSanea strongly disputes.

In his interview Mr. Stewart addresses the second.  He flatly contradicts the AlGosaibi's assertion that Mr. AlSanea was not authorized to exercise control over TIBC and the Money Exchange

What he does not appear to address in this interview is the first allegation.

I would also be very interested in Mr. Stewart's thoughts on the Ernst and Young report.  As per that report, it seems the CEO of TIBC had very limited authority.  Mr. Stewart deferred to Mr. AlSanea on decision making on just about every matter.  Beyond that there was the curious case of payment approvals.  E&Y stated that Mr. AlSanea used Mr. Stewart's password to release payments.  As I noted at the time I commented on the E&Y Report, it is very unusual for a CEO to be involved in  the operational aspects of releasing payments.  And giving another person one's password is generally considered a violation of segregation of duties and dual control.  

It would be highly useful to know how Mr. Stewart:

1. Saw his role as Chief Executive Officer at TIBC  and how that might compare and contrast to CEO's at other banks.  What precisely were the duties of TIBC's CEO and what were those of  Mr. AlSanea?  Is it good form for a CEO to give his password to a third party?  What does it mean when a person in the position of CEO apparently has no power to make any material decision? 
2. Understood  the requirements of Central Bank of Bahrain regulations regarding corporate governance. And, what if any, disclosures regarding Mr. AlSanea's role were made to the Central Bank.

Perhaps, Mr. Kane will have the opportunity to do another interview with Mr. Stewart.

One thing is abundantly clear from this interview and that is the emotional pain and suffering of Mr. Stewart.  Adding to that distress, we learn in this article that he felt abandoned by his own country in the midst of the "arbitrary actions and retaliations of the Bahraini legal system".   

Saudi Arabia Capital Markets Authority Levies SAR7.3 Million Penalty Against Saudi Telecom Ex Director

The Saudi CMA announced today that a final judgment had been made in the case of Mr. Saleh Bin Mohammed Bin Saleh AlHajaaj.  He had been accused of insider trading in shares of Saudi Telecom on 19 and 20 December 2004.

The judgment consists of the following:

1. Payment to the CMA of the SAR7,249,365 representing the profits on his trading those two days from information he obtained as a member of the Board.
2. Payment of SAR100,000 in fines.
3. A three year ban from working for any company traded on the Saudi Stock Exchange (Tadawwul).

Commercial Bank of Kuwait - New Board Leadership & Commentary on 1Q10 Results

Two articles in AlQabas for 12 May.

1. On the Board:  Badr AlAhmad as Chairman and Ali Al Awadhi as Vice Chairman.
2. On 1Q10 earnings and strategy.

Frankly, both of these stories are hard to believe.

In the first we're told about the election of Badr and Ali with a side note that Mr. Ali AlMoussa (You'll remember him as the hero in the corporate governance charade at  CBK's April OGM) wasn't able to join the Board because the "authorities" (the MOIC and the KSE) are cracking down on standby directors requiring that they hold qualifying shares.  And Brother Ali hadn't bought his.  You'll recall he'd been mooted to take Dherar Al Rabah's place as Chairman.  Wonder if Ali owns any KIB shares?  Dr. Mahdi AlJazzaf, another director, also had to resign. given "other commitments" which necessitated his resignation.  It's unclear if these pre-dated his election.  Or recently developed.  Some how I'm guessing the latter.    It seems that directors' flu is not only quite virulent but also highly contagious.

Anyways to make an unbelievable story short, with AlJazzaf's resignation, another reserve director's no doubt reluctant excuse not to serve (Abdul Rahman Al Ali), and Ali Al Moussa's slip of the mind about buying qualifying shares, it seems the Board has decided to have an OGM for shareholders to elect a new Board.  Shareholders will be asked to submit candidates whose names will be submitted to the Central Bank for approval.  Then the OGM will vote.  

I hope your credulity isn't strained yet, because we haven't yet come to the "tafsir" on the 1Q10 financials.  And there is still some very heavy lifting to be done in the "Believe It or Not" Department.

First some comparative data.  1Q10 Operating Profit was KD22 million versus KD25 a year ago.  In 1Q10, CBK decided to take all Operating Profit to its reserves for loans and investments.  This led to a KD1.4 million loss versus a net profit of KD3.3 million in 1Q09.  CBK's CAR is now 19% versus 18.22% at 31 December 2009.  Expenses are down due to a rigorous expense control program - some 10% from 1Q09.

Explaining the decision, the article (which I suspect is based on a press release) states that this heavy provisioning was done to strengthen the bank's financial condition.  Here one is reminded of Jamie Dimon at JP Morgan Chase and his famous fixation on the "Fortress Balance Sheet".  

All well and good, but it seems to me that it is highly unlikely that a bank would deliberately incur a loss to strengthen its balance sheet since by incurring a loss it was depleting capital.   And preserving capital is a great way to have a strong balance sheet.  Rather I suspect that the Central Bank leaned on CBK to provision a certain amount to deal with known problems.  

Other tidbits from the report are that CBK has hired an international consulting firm to help it with its strategy.  A presentation to the Board elected this month is expected shortly.  Since CBK is likely to have a new board as outlined above, I'm not sure if this makes a whole lot of sense.  Note:  I'm not referring to the strategy but to its presentation.  More on the strategy in the next paragraph.

While the strategy isn't yet finalized, it seems that will be built on a focus on Kuwait.

Kuwaiti banks face a real strategic conundrum.  The Kuwaiti market is relatively small with not much scope for expansion of really productive business - which explains why there is a lot of speculation and  a plethora of bone-headed business ventures.  Some would say that the construction of the Kuwaiti economy actually forces businessmen into this sort of activity because other areas are closed to them.  And no doubt there is a lot of truth to this.  Also there are too many banks fighting over this limited pie. - which leads to all sorts of silly competition.  Another real problem is that what pass for acceptable business practices in Kuwait make the practice of prudent banking difficult.

Perhaps, a kindly paternal figure can help sort out this mess.  Or at least hire better script writers.

Hopefully, some of our readers will comment to expand the story and correct any errors in this post.

National Bank of Kuwait - Dabdoub Did Not Resign

AlQabas has an article in which the Chairman of NBK, Muhammad Abdul Rahman Al-Bahar, denies that Ibrahim Dabdoub has resigned from the bank.

And here's one from AlWatan in which Abu Shukri himself denies the report.  AlW says that resignation supposedly occurred in an exchange of emaisl.

This is a strange story and I'm guessing there's more here than meets the eye.  

The typical Kuwaiti investor pattern of making a small fortune by destroying an even larger one?

Perhaps one of our Kuwaiti readers will comment.

BTW when you see Abu Shukri resign that will be a sign to very very carefully re-evaluate your holdings of NBK shares.   His shoes are going to be very hard to fill.

Commercial Bank of Kuwait - Ali Moussa to the Board Next the Chairmanship?

CBK announced on the KSE today that the Board had accepted the resignation of Mr. AlRabah, the Chairman, and had called up the reserve director, Mr. Ali AlMoussa.  

Suspect he's got a bright future at CBK.

[10:12:59]  ِ.استقالة رئيس مجلس ادارة البنك التجاري الكويتي
يعلن سوق الكويت للأوراق المالية بأن البنك التجاري الكويتي افاده
بأن مجلس الادارة اعتمد استقالة السيد ضرار الرباح رئيس مجلس الادارة
وقرر استدعاء العضو الاحتياطي الاول السيد / علي موسى الموسى.‏

Global Investment House - Shareholders' Meeting Approves KD100 Million Capital Increase, Elects New Board and Deals with Shareholder Objections

AlQabas has an article on GIH's 4 May shareholders' meeting.  As well, GIH has posted a press release.  The AlQ article has a bit more detail, including an account of one shareholder's representative who raised several objections.

AlQ began by noting that Khaled AlWazzan was no longer on the Board.  If you don't recall, AlQ had reported his resignation last week which GIH denied.  This is AlQ's "I told you so" moment.  A tricky  issue. Technically, he did not resign.  He just did not stand for re-election.   Though I suppose one could argue that not standing for election was an effective resignation.  Point to AlQ for calling that Khaled was leaving the Board.  Also Shaykh Abdullah Jaabir Ahmad AlSabah, representative of the Public Institution for Social Security did not stand for re-election.   Nor was any Board member elected to represent Social Insurance.

  

The OGM and EGM agreed all the proposed agenda items. AlQ considers these the most significant:

1. No distribution of profits for 2009.
2. Annulment of the previous shareholder resolution to raise KD150 million in new capital (15 June 2009) and its replacement with a resolution to raise KD100 million at a price of KD0.105 per share.  (Book value is KD0.133 per share).  The extra five fils to cover issuance expenses.  The rights offering to be in a single tranche.
3. Grant the Board the power to delist from any stock market the company is listed on.  

Ms. AlGhunaim, the Chairwoman of the Board, said that there were no plans to delist from any market. Nor had the Board undertaken any study in this regard.  The resolution is a precautionary move so the Board will have the power.

She continued that the reduction in the capital raising by KD50 million was done so that small shareholders would be able to cover their allotment.  She expressed confidence that the strategic shareholders would participate.  She also commented that the company was in discussion with many parties about participating.  Apparently in response to a question, she said that one option was for banks - both creditors and non creditors - to participate.  This has been discussed earlier in connection with a debt for equity exchange - which would of course lessen the repayment burden on GIH.

Ms. Al-Ghunaim also noted that GIH was a great buy trading currently at levels not seen since its founding 11 years ago.  And that shareholders knew well what a great deal it was.  That the company enjoyed a great reputation, confidence, etc.  

Also it appears that some shareholders must have expressed concern about GIH closing some of its funds.  She noted these were closed either because they were no longer appropriate investments in the current environment.  Or that their specified terms had finished.  She assured that GIH was ready to pay any fund holder his money at any time and in any condition if that was in accordance with legal conditions.

A representative of a Canadian shareholder then launched into a series of formal objections.  I suspect that Kuwaiti company law has a procedure similar to other GCC states.  Under these provisions a shareholder must formally record any objections to the conduct of the company's business.  Once these are formally recorded in the minutes of the shareholders' meeting, they legally exist and the shareholder may then seek to take further action.   As you'd expect, when a company has a difficult year or when it has gone through a corporate "transition" like a difficult restructuring, shareholders are more likely to voice objections and criticize management than when times are good. 

Here are the points that he reportedly raised:

1. The annual report he got was missing three pages which contained important information.
2. There was a lack of disclosure about the subscribers for the GDR issue considering the fact that they own 35% of the total capital of GIH.  This doesn't appear to have been addressed but perhaps the answer is so as not to embarrass shareholders who paid KD0.995 per share and saw 90% of their purchase price vanish.
3. GIH does not but should have an Investment Committee to find profitable business opportunities and generate returns for its shareholders and to pay off the debt.
4. GIH should pay dividends for 2009 from reserves as it is allowed to under Kuwaiti law.
5. In the rescheduling exercise, the management was more focused on protecting the rights of creditors than the shareholders.
6. The 5% fee for the expenses associated with the Rights Offering will be a burden on the shareholders.

The Board answered these objections as follows:

1. The missing 3 pages were an oversight.  The full report was sent to shareholders and available on the KSE website.
2. The Investment Committee functions are contained within other already existing committees.
3. Re dividends, the Company needs to pay 30% of principal this year and so has to focus its efforts on successfully repaying its debt.  A reason why it is increasing capital KD100 million - which also will serve to help increase revenue.
4. The Rights Offering fees are justified given that leading local firms and world class names like Deutsche Bank and HSBC will be involved.  AA:  I'd note that the fees for the GDR were about 1.9%.  The proposed fees for the previous approved but not executed KD150 million RO were 10%.   5% is probably a very good price considering that the sale is going to be a tough one. 
5. There were some comments meant to reassure shareholders about GIH, including one on the rescheduling that it won "Most Innovative Deal 2009".  This statement like the one about the shares being a great deal because the price is the lowest in 11 years is a great example of making lemonade from lemons.
6. At the end of the article you'll see some comments about assets under management.  There's a typo.  It should be KD1.7 billion. Not million.  AA:  GIH has a very good franchise in asset management.  And as pointed out by GIH's Board, an endeavor that does not require a large amount of capital.

Another notable shareholder question was why GIH hadn't taken provisions against the US$250 million deposit with National Bank of Umm AlQaiwain (AlQaywayn in AA's transcription).   Because GIH's legal advisors recommended against it.   I'm guessing perhaps even more importantly because GIH didn't want to reduce its KD162.8 million in capital.  That would probably trip covenant triggers under the restructuring, hurt GIH's capital adequacy ratio, and make the Rights Offering more difficult.

As it is, GIH has reduced the RO by KD50 million.  I think less out of a concern for small shareholders being able to cover their allotments than to reduce the amount so that the issue is more likely to be successful.  Raising KD90 million or KD100 million against a KD100 million RO will look a lot better than raising the same amounts against a KD150 million RO.

Any RO is going to be a tough slog.  GIH has been trading below par since 15 April and has been trending downwards.  It closed 5 May at KD0.090.  It is therefore unlikely that small shareholders will have any interest in buying new shares for more than they can buy "old" shares in the market.  So the Board will have to schedule the RO to a more propitious time.

At the end of the shareholders' discussion, it's common for the Chair of the meeting, presumably Ms. Al-Ghunaim in this case, to say something on the order of "We've addressed shareholder objections and questions".

I'm guessing this happened and prompted the representative of the Canadian shareholder to pipe up again with a comment that if these clarifications were given in foreign countries, large amounts of money would have to be paid.  Apparently, frustrated, Ms. Al-Ghunaim is reported to have said "O Abdul Munim, O Abdul Munim, let us finish..."  As the AlQ article reports, enough shareholders clapped to show support for her attempt to silence Abdul Munim.  I'm taking from this comment that he probably was quite vocal in the meeting - more than is apparent from the article.  AlQ ends its article by saying that Ms. Al-Ghunaim did not finish her sentence.  Unclear if Abdul Munim did as well.

As to the new Board, here are the names:

• Mrs. Maha Al Ghunaim representing herself
• Mr. Marzook  Al-Kharafi representing Al Kharafi Group
• Mr. Alan H. Smith representing Al Bareeq Holding Company
• Dr. Hj Mohammed Amin Abdullah representing Berlian Corporation (Brunei)
• Mr. Bambang Sugeng Bin Kajairi representing Reem Investment Company (Abu Dhabi)
• Mr. Ali Al-Wazzan representing Jassem Al-Wazan Sons Group of Companies
• Mr. Hamad Tareq Al-Homaizi representing himself
• Ofoq Arabian Real Estate Company (substitute)

Generally, when directors are said to be representing this or that company or person, you can infer that these entities are significant shareholders.   However, the KSE does not show any of any of these.  The mandatory reporting threshold is over 5%.  On the subject of shareholders, you'll notice about 18.5% held by BNY Nominees Ltd and Bank of New York Nominees.  These are the GDRs.

New UAE Corporate Governance Code - Effective 30 April 2010

Below are the texts of the "new" corporate governance code.


Arabic language - which is the governing text.

English language - for convenience.

Commercial Bank of Kuwait Weekly Board Meetings -- Priority Negotiations with Distressed Clients

AlWatan reports on the dynamic goings on of Commercial Bank of Kuwait's new board.  Almost weekly meetings to discuss and implement strategy.  A new temporary CEO, Luay Fadhil Muqamis, has been appointed.  Priority given to negotiations with distressed clients (unable to pay).

After reading this, it seemed to me as though the Chief Editor of AlWatan has a friend inside CBK. Or some other close relationship.

Damas Elects New Board

As you've probably seen in press reports yesterday, Damas held an Extraordinary General Meeting of shareholders yesterday at which a new board was elected.  Here's the press release on NasdaqDubai with more details

As to the new board, the new members are:

1. Abbas G. Ameeri
2. Abdullah Fadhel Ahmed AlMazrui
3. Anan Fakreddin
4. Ehsan Abbas
5. Ibrahim Belsalih
6. Nicholas G. Hegarty
7. Simon Copleston
8. TN Pratap
9. Tariq L. Ali

The EGM also approved:

1. Dual listing of shares in both US$ and AED.  (Previously, Damas was listed only in US$ on NasdaqDubai).
2. The resignation of the former directors.

As you'll recall the DFSA settlement required a change in the Board along with other measures outlined here.

Commercial Bank of Kuwait - New Board The Godfather in Kuwait

An interesting post by Sal over at Alphadinar.    Why Dherar Al-Rabah was Appointed Chairman of Commercial Bank of Kuwait. 

Commercial Bank of Kuwait - Fireworks at Annual Shareholders' Meeting - Directors Not Released from Responsibility for Fiscal Year 2009

AlQabas has a report on CBK's Annual General Meeting of Shareholders ("AGM") 7 April.  (Also sometimes referred to as an Ordinary General Meeting to distinguish from an Extraordinary General Meeting.  The difference between the two arises from the entity's articles of association which set forth the powers of each.  For example, an amendment of the Articles generally requires an EGM).

Some 85.49% of shareholders were at the meeting which proceeded calmly until the 9th Agenda item - the release of the Board of Directors and the Managing Director from responsibility for their conduct during the last fiscal year (2009).  Generally, not a contentious issue.  Usually approved quickly.

This time was different.   As the AGM moved to Item #9, Ali Musa Al Musa, Chairman and Managing Director of Securities Group,  made two proposals.

1. To delay voting on releasing the old board and the previous Chairman/Managing Director, Dr. Abdul Majid AlShatty from responsibility for their conduct during fiscal year 2009 until a future AGM  (While these are generally scheduled once a year, there is no reason one couldn't be called sooner).  In the interim the new board would conduct a legal, management and accounting review of the conduct of the previous board and managing director to determine if they had taken any salary, benefit, compensation or other perk during 2009 and the period up to the date of the AGM (when they were still in control of the bank).
2. And that in line with sound corporate governance, the principles of disclosure, transparency etc the AGM vote that no member of the board or the managing director can receive any salary, benefit, compensation or other perk without the prior agreement of an AGM with full disclosures of the package. 

Mr. AlMusa's proposals passed with 79% of the vote.

There is a transcript of the exchange between Mr. AlShatti and Mr. AlMusa.  As you might expect, AlShatti took AlMusa's proposals as a personal attack.  So there is some interesting back and forth.  AlShatti saying that he and Jamal AlMutawa had taken at 15% salary cut noting that whatever the AGM said, or did not legally the Board was not released for its conduct until after 5 years.  He also noted that the board had served loyally for 12 years.  For his part AlMusa denied that he was accusing anyone, but fighting for fundamental principle of shareholders' rights.

Buried in the third paragraph from the end of the article is a statement that the Central Bank of Kuwait supposedly ruled that any profit from the sale of Boubyan Bank shares by CBK belongs to CBK's shareholders not the creditors of TID.   This is an important point to watch in view of the current market value of BB being roughly twice the amount of the repo between CBK and TID.

CBK's new board comprises Darar Al-Ribah as Chairman, Ali A-Awadi, Anud AlHatharan, Ahmad AlMishari, Badr AlAhmad, Tariq AlUthman, and Mahdi AlJazaaf.   

Note:  AlShatti had objected to the election of AlMishari saying he had not been cleared of his responsibility for 2009 and that it was nothing personal.   AlMishari apparently was a director in 2009 but resigned prior to the AGM.   In responseAlMishari said he had resigned for "lack of fit" with the board.

Alternate Directors (in case one of the above leaves the board) are Ali AlMusa, Abdul Rahman AlAli,  and Mohammad AlShatti.

More on Omar Bin Sulaiman

Here's an update on Dr. Omar Bin Sulaiman by way of a press item from WAM, the Emirates Official News Agency.   

It seems the AED 50 million consists of bonuses he awarded himself for his performance while Governor of the DIFC.

What's highly interesting is the last sentence in the press release.

He also said a number of similar cases will soon be referred by the Public Prosecution to the court of justice.

Not because I'm particularly shocked that there was corruption but that it seems to be being pursued.   

In an article based on this press release, Gulf News comments:

A number of high-profile corruption cases have gone to court with the Dubai Court of Cassation handing irrevocable imprisonment and a fine of millions of dirhams to two former Nakheel executives.
The same court handed a similar jail term and fine of about Dh14 million to an Emirati former executive of Dubai Industrial City.
The Cassation Court will issue its ruling against five officials involved in the same graft case.
The Appeals Court and the Court of First Instance are looking into ten cases of corruption involving more than a dozen officials of companies such as Deyaar, Tamweel, Waterfront, Nakheel, Mizin and Dubai Islamic Bank.
Some have been sentenced and others are being questioned in court. Gulf News has learnt that Deyaar's former CEO could be facing a fifth case.

Damas - The DFSA Report in Detail

In my previous post I made the comment that the DFSA enforcement actions revealed three themes:

1. An almost unbelievable  pattern of  disregard for the health of DIL and the rights of minority shareholders and other stakeholders by the Abdullah Brothers.  They treated the company as their personal "piggy bank" withdrawing funds when it suited them and then "repaying" the Draws by selling the company assets. 
2. A profound failure of corporate governance at the board, senior officer and auditor levels.   The Board seems to have failed to ask the most basic of questions and to have the most basic of procedures.  Senior management was aware of the Abdullah's practice of "Drawing" funds and other shortcomings, but did not advise the Board.  In March 2009, a DIL Internal Audit Report stated "a large scale diversion of funds from the company by the directors.  The total exposure stands at a whopping AED525.19 million as on 30th  September  2008".  The Report was only circulated to the DIL Managing Director (one of the Abdullah Brothers) and the CFO, but not to the Board or Audit Committee.  In both cases it's hard to understand why independent directors were not notified.
3. A transaction connected with Damas IPO which raises some troubling questions about the involvement of DIG and some of its affiliates, all of whom are part of Dubai Holding.

Given what went on at DIL, I think a detailed review of the DFSA's findings outlined in their Enforceable Undertakings is worthwhile.  Let's step through the Enforceable Undertaking with Damas International Limited ("DIL").  The one for the Abdullah Brothers repeats the same findings. 

Section 6.1:  Board Meetings 

1. Inadequate or no financial info given to Board to enable it to assess DIL's situation.
2. Board packs given to directors only at the Board meetings.  Not before.  Information in packs  insufficient to make decisions.
3. Board minutes poorly maintained and did not accurately reflect decisions and discussions.

Section 6.2:  Audit Committee

1. Did not meet formally during the 2008-2009 fiscal year. It's first formal meeting was 26 July 2009.
2. "Failed at all material times" to meet with Damas Internal Audit team.  Did not receive nor ask for any internal audit reports.  See no evil, hear no evil ...
3. The AC didn't set its own Terms of Reference or establish procedures for Internal Audit reporting to it or the Board.
4. Failed to monitor the Internal Audit function.  

Section 7:  Directors' Draws

1. The Abdullah Brothers treated DIL as their personal "piggy bank" and withdrew money from company accounts with apparent little concern for the impact on the company itself or shareholders even after they had taken the company public.  Only the Brothers were entitled to make such Draws.
2. DIL's Board, Finance Department, Internal Auditor and external auditor were all aware of this practice. More importantly there were no controls on the amounts or purposes for drawings until October 2009.  That is, until after the abuses had become so large they could no longer be ignored.. 
3. Between 1 July 2008 (sale of shares was ongoing at this point) until 27 October 2009, the Brothers made some 2,200 draws for relatively trivial amounts (fuel expenses) all the way to substantial  sums for personal investments, personal loan repayments, etc.  A total  AED 600 million was withdrawn and then retroactively settled by what appear to be questionable netting transactions, reducing the Directors' Draw to AED 365 million.  Tawhid Abdullah borrowed 1,940,250 grams of gold to repay his third party personal gold loan. DIL has yet to be repaid by Tawhid.

Section 9:  DVG Transaction (DIFX Listing)

1. When it was clear that DIL's IPO was not going to get enough investor take-up to secure the 25% free float required for a listing on the DIFC (now Nasdaq Dubai), Tawhid Abdullah arranged to create artificial demand.  He approached Dubai Investment Group, Dubai Ventures and Dubai Financial, apparently proposing that they buy shares in their own names but that the Brothers would provide the funding.  Either that or that they would "lend" their names and front for the Abdullah Brothers.  These three entities subscribed for some 100,000,000 shares in toto - roughly divided equally.
2. As a side note, this amount represented 37% of the total Offering.  Original Offer Circular here.
3. The three Abdullah Brothers withdrew a total of AED293,843,000 from DIL accounts during July 2008 and transferred AED275,480,000 to DIG and AED 18,363,000 to Dubai Ventures.
4. This transaction was documented as a US$100,000,000 personal loan from Tawhid Abdullah to Dubai Ventures dated dated 19 August 2008 (the "First Loan").  Unclear why the loan was for this amount as the cost of the shares was roughly US$80 million.
5. In March or April 2009, a series of subsequent documents were drawn up but backdated to August 2008 and some forward-dated to August 2009.  The purpose of these documents was to disguise the nature of the transaction and to reduce the Directors' Draws used to fund the share purchase.
6. The First Loan was assigned to Damas Jewelry in an assignment dated 20 August 2008.  Mr. Tawhid signed both on behalf of himself  as original lender and on behalf of Damas Jewelry to legally document the assignment!  That is, he signed for both parties in the transaction: assignor and assignee.  This assignment effectively reduced the Directors' Draw.  Note despite its date, it was actually signed in March/April 2009.
7. The First Term Loan was replaced by a Second Term Loan between Damas Jewelry and Dubai Ventures for US$80,000,000 via a document back dated 21 August 2008.  In a document dated 22 August 2008, the Second Term Loan was assigned from Dubai Ventures to DVG (a related company).
8. Then there was an exchange of letters actually signed in March/April 2009 but dated 19 and 20 August 2009 to convert the loan to an investment arrangement.

It's pretty clear that at inception this was a fraudulent transaction designed to trick the DIFX into believing  that the IPO had sold enough shares to the public to meet the Exchange's listing requirements. The subsequent  loan agreements, assignments, and investment management agreement were designed to cover up the draws by the Abdullah Brothers and provide "cover" for reducing their Director Draws.

Frankly, many out there reading this saga are going to have some pretty fundamental questions about the behavior of DIG and its subsidiaries - all entities owned by the Government of Dubai's Dubai Holdings.  How they came to be involved.  And what sort of business judgment and ethics they employed in participating in this transaction.

Section 10:  The Sharjah Transaction

1. Damas Real Estate ("DRE"), a company owned by the Abdullah Brothers, purchased land in Sharjah for AED5,141,700 in January 2005.  This predates the July 2008 share flotation. 
2. Between January 2005 through 25 March 2009, the Abdullah Brothers used an unspecified amount of Damas Company funds to develop the property including erecting a building.
3. Around 25 March 2009, Tawhid Abdullah, former Managing Director of DIL, proposed to the Board to sell DIL the land for AED70,000,000 to AED90,000.000.  The clear goal was to use the transaction to reduce Director Draws prior to the issuance of the year end financials.  The Board was not told that Damas funds had been used to develop the project. 
4. At least that's what the DFSA says. As I read this transaction and others, it's hard not to have the nagging suspicion that the Board may have realized that it was critical to regularize (reduce) the Directors' Draw situation as soon as possible. And was so delighted at any transaction that would lead to a reduction that they didn't look too closely. 
5. The Board agreed to the sale after a Cluttons valuation and paid some AED85,000.000.  Instead of paying cash Directors' Draws were reduced by an equal amount.
6. As part of the transaction, the project was supposed to be developed for staff to live in with investment opportunities offered to staff.  As per the DFSA up to 21 March 2009, Tawhid did not formulate or implement the employee residential property investment scheme.

 Section 11:  AlWasl Transaction

1. AlWasl DMCC (owned by Tawhid and Tamjid Abdullah and a third party) bought two plots of land in the DMCC free zone in June 2007, again well before the DIL IPO.
2. In December 2008, Tawhid Abdullah proposed to the Board that DIL buy the plots, but did not inform the Board of the Brothers' interest in AlWasl.
3. No reasonable due diligence was done.   Board approved the purchase.
4. DIL acquired the land by paying AED46,200,000 - though again there was no cash outflow.  The asset was put on the books and the Directors' Draws reduced by an equivalent amount.

Section 12:  DRE Transaction

1. In December 2007, Damas placed an AED150,000,000 deposit with United Arab Bank ("UAB")  to secure a loan of an equivalent amount made by UAB to DRE.  In January 2008, the deposit was legally pledged as collateral.  The Board was not advised.  This was before the IPO.
2. In October 2008, UAB used the deposit to repay the loan.
3. Presumably, but not mentioned, this was also treated as a Directors' Draw. 

Section 13:  Mashreq Bank Loan

1.  On 13 July 2008 (after the IPO), DRE received an AED70,000,000 loan from Mashreq.  The loan was drawn on 14 July with proceeds transferred to a personal account of the Brothers at First Gulf Bank.
2. On 11 September 2008, Tawfique Abdullah authorized the transfer of AED70,000.000 from a Damas account at UAB to Mashreq to pay off the loan.
3. Again presumably treated at DIL as a Directors' Draw though this is not specified.

Section 14:  Gayrimenkul Transaction

1. In August 2008 (after the IPO) in a series of transactions the Brothers withdrew AED66,301,560 from a Damas account at UAB and transferred it to Gayrimenkul to buy real estate in Turkey.
2. These withdrawals were not advised to the Board until October 2009.

Section 15:  AED42.5 Million Directors' Draw

1. On 18 July 2008, Tawfique Abdullah authorized the transfer for AED42,500,000 from a Damas account to a bank account held by the Brothers.
2. The withdrawal was not disclosed to the Board. 

Section 16:  Gold "Borrowing"

1. In December 2007, Tawhid Abdullah borrowed 2,000 kilograms of gold from a third party.
2. On 1 September 2009, he allowed the lender to take 1,940250 grams of gold from DIL to repay his personal "gold loan".  No disclosure was made to the Board.
3. Tawhid has not yet restored the gold to DIL.

This is a damning report on the Abdullah Brothers and many others involved in the running and monitoring of the company.

I had posted this back in December.  The DFSA Report only re-emphasizes the importance.

When investing in a family company make sure you've got adequate control  at the Board over the family members' management of the company and signature authorities (enhanced requirements for Board approval is one technique), robust corporate governance actually implemented, and of course detailed disclosure of company affairs.

Saudi Capital Markets Authority - Changes to Corporate Governance New Definition of "Independent Director"

Well, it really is the season for corporate governance (or at least official announcements  about it).  The Saudi CMA has issued an amendment to the definition of "independent director" today.  So far only the Arabic text is posted.

A few quick comparisons:

1. Both codes set forth certain points which make a director not independent.  Bahrain's test is within the past one year.  CMA's the past two years.
2. The definition of "associate" is spelled out in detail in terms of personal relationships in the Saudi code.  The Bahrain Code just uses the term "associate" which does not appear to be defined in the Code itself.
3. The Bahraini Code has a relatively low threshold of BD31,000 (US$82,150).  Payments over this amount mean an individual is not independent.
4. The CMA definition includes owners of a controlling interest in auditors or advisors.  The Bahrain Code does not explicitly state this, though it does use the term "indirectly".

BIS Issues Consultative Document on Corporate Governance

Apparently, it's the season for corporate governance.  The BIS has just released a consultative document on the topic.  Text here.

The Central Bank of Bahrain is pretty well known for its practice of incorporating international standards into its regulations.  It will be interesting to see how they deal with this development given the release yesterday of Bahrain's much labored over Corporate Governance Code (which applies to all joint stock companies in Bahrain not just those regulated by the CBB.

Bahrain Issues New Corporate Governance Code

Copyright Gulf Daily News Bahrain

 

Today the MOIC and Central Bank of Bahrain officially announced the new corporate governance code which will be become applicable 1 January 2011.

Here is the text of the CGC as per the CBB website.

While the CGC has been a while in the making (and involved some co-ordination "issues" between the MOIC and CBB as well as the usual consultation process and objections by industry), the struggles to get the text finalized will pale next to securing effective implementation at the company level.

That being said it's a step in the right direction.

GDN article here.

Saudi Capital Markets Authority - Corporate Governance Seminar in Partnership with Swedish Trade Council 9 February 2010

 

Copyright AlRiyadh Newspaper Saudi Arabia

Last December I had noted that the CMA had planned a corporate governance seminar for February in partnership with the Swedish Trade Council.

Here's the report and pictures from AlRiyadh Newspaper on the seminar.  Impressive list of speakers and good topics.  Summary here.  You can use this link to view additional information on the seminar.

Also here are the CMA's Corporate Governance Regulations (issued in 2006).  Definitive text here in Arabic.

Damas Appoints Chief Restructuring Advisor

Damas announced some senior management changes at Nasdaq Dubai today.  Most of these are interim appointments while the Board conducts a search for a permanent replacement.

But one appointment did stand out:  that of  Mr. Sanjay Manchanda, a Partner at PricewaterhouseCoopers,  as  Chief Restructuring Advisor.

Damas - Manifest Absurdity

The National has another article on the Damas saga.

This one about the plight of the Abdallah Brothers who are having difficulty making restitution for the unauthorized withdrawal of funds from Damas to fund speculation in the Dubai real estate market.  They may have to sell their yacht pictured above and fish from two smaller boats.  It takes a hard soul to hear a story like this and not feel compassion, I suppose.  Mark AA down as having no sympathy. 

But the gem in the article was this quote.

“There is nothing mysterious in the unauthorised withdrawals. It was an oversight in getting the approvals,” said the source, who declined to be named because of a continuing investigation into the transactions.

As I understand it, the funds were withdrawn from Damas to make personal investments in real estate.  That is, these assets are not registered in the name of Damas.  Call me old fashioned but when you take someone else's money and use it for your own purpose, that's not an oversight. 

Damas - Looks To Sign Standstill With Lenders

The National reports that Damas is on the verge of signing a formal standstill agreement with its creditors, noting that an informal standstill had been in place since last November.   As per the article, the plan is to freeze principal repayments until 31 May though to continue to accrue interest.  Clearly, this is just the first step.  A revised repayment plan will have to be devised.  For that purpose and probably to give creditors some comfort, there are rumors that the company will hire a partner from PricewaterhouseCoopers to act as chief restructuring advisor.  It is unclear if this will be an advisory assignment in which Damas engages the firm.  Or whether a partner will be engaged to work at Damas in a capacity similar to that used by The Investment Dar (Mike Grant) or Dubai World (Aidan Birkett).

Assuming The National's sources have the correct story, what's revealing in the article are two comments which go to the heart of corporate governance as well as raise issues of defalcation.

First, that the conversion of Damas' loan to Dubai Ventures to a managed investment account was not authorized by the Board.  What is even more relevant is the authorization of the loan in the first place.  What on earth was a jewelry company doing in the loan business?  A reasonable guess would be that the loan like the conversion was not authorized by the Board.

Second, that the funds that Mr. Abdullah borrowed from Damas and which he and his brothers have agreed to pay back were used for real estate speculation in Dubai.   No doubt the belief was that the investments were a "sure thing" and that the profit could be realized and the original funds returned without problem.  The Brothers now are faced with trying to sell these assets in a depressed market.  I believe that the Board should resist any attempt to have them accept these assets as satisfaction for the obligation.  The risk on the assets should remain with those who purchased them.

Also as I've noted before, it's always very wise idea when investing in a business with a dominant shareholder to make sure the boundaries are very clearly set between that shareholder's money and the company's and that there are adequate controls in place to minimize "crossover" transactions (via signing authorities, etc) and robust mechanisms to monitor the company to detect any violations.